Morningstar DBRS Takeaways from 2025 Credit Outlook Europe: Spanish Banks Still Riding Tailwinds

As part of its takeaways series, Morningstar DBRS is publishing write-ups about pertinent topics discussed at 2025 Credit Outlook Europe, an industry conference series that addressed key insights and risk factors that will shape the European credit markets in 2025. The takeaways below come from the 21 November event held at the Casa de América in Madrid.

Elisabeth Rudman, Managing Director, Global Financial Institutions Ratings at Morningstar DBRS, introduced the framework for understanding how European banks will face the challenges and opportunities expected for 2025.

POSITIVE TRENDS PREVAIL FOR SPANISH BANKS' CREDIT RATINGS
Solid results and a favourable macroeconomic environment are supporting improvements in Spanish banks' credit ratings. Morningstar DBRS remains optimistic about the Spanish banking sector in 2025; in fact, throughout 2024, Morningstar DBRS analysts assigned Positive trends to a higher than usual number of European bank credit ratings, especially in Spain, Italy, Portugal, and Greece.

European banks have benefited from the higher interest rate environment, which is not expected to carry over into 2025; however, Rudman pointed out that "it's likely that the compression of net interest margins will be made up for in part by an increase in the volume of loans and commissions".

ASSET QUALITY TO REMAIN HIGH
Industry experts had anticipated a decrease in asset quality this year, but this has yet to materialise, and Morningstar DBRS expects banks to be able to manage any future weakening in asset quality.

Average nonperforming loan (NPL) ratios are converging on the balance sheets of banks across Europe, with the current rate at 2.5%. However, European banks are well situated to face any potential deterioration in asset quality thanks to their strong capitalisation and provisions. Notably, Greece's NPL ratio plummeted from 40% in 2019 to 5% as of H1 2024. However, NPL ratios have increased for European banks' exposures to the real estate sector; for example, in Germany.

SPANISH BANK PROFITABILITY
Marcos Álvarez, Managing Director, Global Financial Institutions Ratings at Morningstar DBRS, moderated the panel, "Sustainability of Spanish Banks' Profitability and Asset Quality", where some of the top representatives of the Spanish banking sector gave their perspectives on the key challenges facing the sector in the coming year.

María Jesús Parra Chiclano, Vice President, European Financial Institutions Ratings at Morningstar DBRS, noted that "Spanish banks are experiencing a sweet spot in terms of profitability after more than a decade operating in an ultra-low, and at times even negative, interest environment. They are also currently enjoying written-off balances, generous liquidity supplies, and a solid capital position".

The panel discussed how Spanish banks had spent years "in the gym" so that once a favourable environment materialised, they would have the necessary muscle to reap the benefits.

On a European level, Spanish banks are among those that have benefitted the most from interest rate rises because of their balance structure. Furthermore, their clearing out of problematic assets over the course of the last decade means that Spanish banks are generally reporting more normalized costs of risk, in line with the European average. "In this favourable interest rate environment, Spanish banks should be able to largely maintain the levels of profitability that we've seen over the past year", said Parra Chiclano.

BANKS AS PROTAGONISTS IN THE REAL ESTATE MARKET
Lower interest rates have sparked dynamism in the real estate sector, and Spanish banks have benefitted from this. Sector representatives state that banks play a crucial role in mediating the marked inequality between the supply and demand of housing, as they are currently financing 70% of the necessary capital towards the construction of new homes. While in 2006-08, 600,00 new homes were built in Spain, in 2023 this figure was barely 90,000. The housing shortage has caused, and will continue to cause, a lot of tension in the real estate sector, especially in the face of population growth, and Spanish banks will be a key player in easing this.

A POSSIBLE BANKING MERGER?
The panel also spoke on the possibility of banking mergers, which seem more likely on a domestic level than internationally. There is space for mergers to occur, but they would not be without risks. Parra Chiclano concluded that "from a credit ratings perspective, banking sector mergers could be beneficial, but it's important to remember that if these entities become too large, systemically, resolving these consolidations would be challenging even with the existing regulatory mechanisms.

Written by Fernanda Febres-Cordero

Notes:
For more information on European financial institutions, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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